Fantasy world of pension deficits

Last Monday the Financial Times ran an article, by independent pensions consultant, John Ralfe. that alleged that there was a massive 'black hole' in the Universities Superannuation Scheme, the USS, the second-largest private pension scheme in the UK. This repeats the sensational and irresponsible allegations he made on Newsnight the previous week.

Here is the reply by Con Keating and myself published in today's Financial Times pointing out that this is Alice in Wonderland economics.

John Ralfe famously, when he was finance director of Boots in 2000 and 2001, moved the investments of the pension scheme from a balanced portfolio to 100% bonds based on new theories from financial economics and against conventional actuarial practice.

About the same time actuaries were being told (by Ralfe and others, for example Exley, Mehta and Smith) that markets are efficient and market prices contain all the information there is. Therefore market prices of financial assets like shares and bonds must be objective, scientific values. This led to the development and enactment of supposedly objective accounting rules meaning that actuaries and accountants need do little more than calculate market values for assets and liabilities in order to value pensions. But the idea that markets are efficient in this fundamentalist manner has been questioned by many economists following the financial crisis where many market values turned out to be illusory.The evidence against the efficient markets hypothesis is surely by now overwhelming and it is shocking to find somebody still advocating it in the face of that.

Ralfe is saying is that pension schemes must always be fully funded - that is, they must have enough assets to cover their liabilities at all times. And any that do not - because they rely on payments from future service and new members - or because the calculation of the liabilities figure is unrealistic - are in deficit and must find the money to fill it. This is insisting on suddenly changing the model - a bit like telling all householders they are in deficit because they have a mortgage and have to pay it off - a model that is known to work well is replaced by one that does not - for what are essentially ideological reasons.

Dennis Leech : 05 Nov 2013 00:06 |  Tags: Pensions; Uss |  Comments (0) |  Report a problem